Monday, August 31, 2015

We have just received the news that Apple and Cisco have
become partners, with the goal of better integrating iPhones with corporate
networks in general, and specifically with Cisco products for visual
conferences over videolink or web services. This is short time after Apple
became partners with IBM to create apps (software) for the workplace. While the
IBM partnership is mostly oriented toward the large corporations that IBM
serves, Apple also has many partnerships in which it either helps develop apps
or helps app-developing firms connect their offerings to give greater
functionality for small businesses.

Clearly, Apple is interested in becoming more of a company
that serves businesses, in addition to its current strength in serving
consumers. The opportunity for Cisco, IBM, and other partner firms is that so
many employees own iPhones, often as a result of their own choice rather than a
company purchasing policy. Integrating the iPhones deeper into what the company
does can be an opportunity for simple tasks like meetings over a distance, and
for more complex processes like scheduling, staffing, and sales. From the
viewpoint of firms that provide these services now, the iPhone looks like a
Trojan horse – something that got into the business because it looked nice and
harmless, but is now ready to become a potent competitor.

So who does the iPhone compete with? The interesting feature
of these competitive moves is that an iPhone (in fact, any smartphone) can be
programmed and networked in so many ways that it is very unclear where the
limits are. Both established Apple partners and new firms can apply their
creativity to the task of seeing what business activities can be improved by
integrating iPhones. Already we know that any video-conference service other
than Cisco should be worried because the link between Apple and Cisco link takes advantage of
the complementary business presence and software/hardware of Cisco and personal
presence and software/hardware of Apple. But that is just a starting point. The
next steps can happen very quickly, because starting new app-based businesses
these days can be done within a few weeks.

Network Advantage in competition among firms comes from
placing the firm in a position where it can benefit from its network of partner
firms. It is not surprising that Apple is working hard to get network advantage,
because their business is based on products that connect to networks and let
their owners get personal network advantages.

Thursday, July 23, 2015

Much has been written about the aftermath of the Greek
crisis, but a key point raised in a recent Wall Street Journal article is the
significant distrust of politicians and divides among people following the
contentious politics around the referendum on the bail-out package that was
offered Greece from the EU (but actually withdrawn before the vote date).
Greeks on the left and far right don't trust EU, and many would like to leave
the Euro. Greeks along the political spectrum believe their politicians cannot
be trusted to govern competently.

Distrust and divisions matter because the Greek recovery
will largely be determined by how much Greeks believe in their country.
Currently, others do not. Even worse, many of the wealthiest Greeks have moved
their money abroad and may well decide to keep them there until they see how
the economy is doing. But an economic recovery requires someone to invest in
business. Will the citizens of a nation with distrust and divisions invest?

A useful comparison for Greece might be Kenya, for two reasons. First, Greece is now a developing economy, and Kenya has been one for
a while. Second, while the distrust and divisions in Greece are recent, Kenya has
long been divided ethnically and politically, and distrust of the state runs
deep. In recent research published in Administrative Science Quarterly, Chris
Yenkey examined the spread of stock market investment in Kenya. Stock market
investments are now wide-spread after the exchange in Nairobi opened, and it is
spread nationwide but with some areas seeing more investment than others.

What drives investment under these conditions? Success. The
strongest driver of investment by a Kenyan is how much profit others have had
from their investments. That is not surprising, but there are many other
results that are very interesting, and informative for Greece. First, divisions have strong effects. The investment results of others matter much more if they belong to the
same ethnic group. People pay more attention to similar others, even if they
are looking at objectively the same thing – stock market gains. Second,
distrust matters. People living in towns with political leadership from a rival
ethnic group paid less attention to the profits of those from different ethnic
groups.

Equally important, the divisions can be bridged. In Kenya,
people who lived in neighborhoods or worshiped in religions with a mix of
ethnicity paid more attention to those who were different from themselves. People
who saw much national (rather than ethnic-political) advertising were less
likely to see only the gains of same-ethnicity others. Division and distrust are in the minds of people, and differences can be thought of as harmful division or helpful diversity.

The result is some old fashioned advice for Greece. Do whatever is
necessary to bring the people together. Do whatever is needed to help them
think of the nation rather than its politicians. The new part is that these
actions are not just for reducing conflict and increasing confidence in life.
They also help investment, and can be important for improving the economy.

Sunday, July 5, 2015

I think I am not the only one who has noticed how
web sites are becoming pretty needy these days, using both pop-up ratings and suggestion boxes to try to get comments on the products
and any other idea that the user may have. I first saw this (and was annoyed)
when Amazon wanted ratings of my purchases and help fixing its suggested books,
but many others use these functions. I just looked up one of the firms
providing such tools and found that it has Barclaycard, Verizon, Telefonica,
and Skype as its customers. And those are just the ones that are so famous that
it posts their names on its web site.

I don't reply to such requests. I have other things to do,
and think that firms should fix their problems without my help. I think
many others also don't reply, either for the same reason or because they think
that no one will take their suggestion seriously. But there are also people who
do type ideas into these suggestion boxes, ranging from simple
tips to longer proposals. So do the firms listen and adopt the ideas? Well,
here is a potential problem. The more people give ideas, the harder it is to
pay attention to them because there are simply so many ideas that the firm can't
handle all. They have idea crowding.

Henning Piezunka and Linus Dahlander just published research in Academy of Management Journal on what happens when firms have suggestion tools, and get idea
crowding. Their work was built on a simple idea with some neat additions. The
simple idea is that idea crowding means ideas are less likely to be used.
Quality doesn't help; idea crowding
simply makes it harder to do anything. The first addition is that ideas also
are less likely to be picked when they are distant from what the organization does
or looks at. Again, quality doesn't help, anything distant is less likely to be
picked even if it is great. But it is the second addition that really gets
interesting. Idea crowding makes the effect of distance stronger. So when an
idea is distant and there is idea crowding, the idea has to be truly
exceptional to be used.

So far theory, but what about the evidence? Very simple: the research found that all
the effects of crowding actually happen. And that has an interesting
consequence for that really great idea you are
about to type into the suggestion box. It will be used if it really is that
great, but you do have to hope that the firm does not have idea crowding and
that the idea is not distant. Type your idea and hope that others don’t do the
same.

By the way, you can give me ideas by sending them to my
email. Will I do what you say? Well, it depends on how good they are and how
much idea crowding I have.

Sunday, June 7, 2015

Readers who think that India is the opposite of China – democratically
developed and economically backward – should be seeing recent news as eye
openers. The center of mobile phone making is moving from Korea to China,
right? Well, except that Indian mobile phone maker Micromax (and some domestic
rivals) are showing the world one more way to compete in the mobile phone market,
with new product release times coming significantly less than a month apart.
Compare that with the iPhone release schedule, and you see how advanced Micromax
is. Naturally they are quickly gaining market share.

Development is also going quickly elsewhere. The Indian auto
industry (yes, there are multiple makers) is introducing new models that are competitive
with imports, its high tech industry is now so advanced that talk about closer
US alliance leading to license manufacturing of arms in India is sounding
realistic, and on the political front there is even a sudden (though very late…)
resolution of the major border dispute with Bangladesh.

The idea is simple. We often believe that non-western
economies have more informal contacts between firms than western ones, and also
are more reliant on business groups of firms controlled by owner families. The
second of these statements is false, by the way, there is a lot of variation in
business group presence across nations, and it does not follow a clean
western/nonwestern line. This article looked at the connections part, which we
know less about because it is often hidden. But it can be revealed by seeing
who has the best information, which the authors did neatly by examining which stock
analysts were best able to predict firm performance.

If development means westernization, we should see
traditional forms of ties between firms disappear, right? Well, this almost happened. Stock analysts were unusually well informed about firms in which the
CEO had the same caste or ancestral language, but only if the CEO started the
career before the economic reforms in 1990. They were also unusually well
informed about firms in which the CEO came from the same school as them, but only
for CEOs starting the career after the reform. That school effect sounds like
something that would not exist in western economies, which have rules on information release, but actually it does.
Indeed, westernization doesn’t mean that networks don’t matter; it means that
different networks matter.

So in what way is India different from a westernized economy
then? It is that both types of ties exist at once. The traditional ties are not
gone; they are just limited to the “older” CEOs. “Westernized” ties exist in
addition. Perhaps the old ties will be gone at some point, but it is hard to
guess now that it will happen, and it is incorrect to assume that it has
already happened.

Tuesday, June 2, 2015

The latest news on the fire in the Bangladesh clothing
factory that collapsed in 2013, killing more than 1,100 people, is that the
owner, national and local building safety inspectors, and some factory
supervisors have been charged with murder. This is a stronger charge than the
expected homicide charges, and happens because their guilt in overlooking sudden
cracks in the structure and ordering employees back to work is considered
serious.

Meanwhile, the major U.S. clothing companies that used that
factory and many others in Bangladesh have been increasing their checking of
safety at their suppliers, and have formed consortia to effectively coordinate
these checks. This is a big step forward from the earlier practice of rare
checks (or no checks), but they are still checking less than one-third of the
clothing factories in Bangladesh, leaving many unsafe factories with less-known
(but usually foreign) customers.

In Bangladesh, people held responsible are being punished.
In the U.S., companies buying from the factory were facing publicity problems
and could also have been targeted by social movements against sweatshops if
they had not acted quickly. So what drove the reforms, threats of punishment or
better understanding of the factory dangers?

A recent paper by Forrest Briscoe, Abhinav Gupta, and Mark Anner in Administrative Science Quarterly provides some useful answers. They
looked at how universities react to threats – from social movements, not the
law – that target sweatshop purchases by Russell, a firm that supplies branded sportswear.
They looked at two ways that universities might decide to manage their supplier
relations differently: either by learning from each other, or by simply
responding to threats. Both would be good reasons to stop purchasing from
Russell until it reformed its supply lines, but the key finding was how these reasons
interacted. If a university stopped purchasing after being targeted by a
threatening campaign, other universities reacted as if there was nothing to
learn from it. It had simply reacted to a threat, so it probably didn't have a
real reason. If a university stopped purchasing after collecting information,
with no threat, other universities might copy its actions.

The conclusion is an interesting one for all who want to
improve organizational practices. Threats work. But they work very locally, and
expensively. The most important way that organizational change happens is
actually when organizations learn from each other, and that happens much less
when threats are involved. So the prosecutions in Bangladesh are important for
the families of the victims, and the actions of the social movements in the
U.S. are important for the conscience of the activists, but organizations
learning from each other give the strongest results.

Monday, May 25, 2015

Li Hejun is the tycoon who owns more than 70 percent of
Hanergy Thin Film Group, a solar energy firm that became famous after its
shares dropped by 47 percent on May 20. The price drop was remarkable for the total
stock value loss and the fact that it made him lose his position as the richest
man in China; it is also remarkable for having happened in a fraction of a
second thanks to computer trading driving share prices down.

There is now a great deal of uncertainty around Hanergy and the
events of the stock value fall, so what I am writing in this paragraph could
become outdated quickly. First, it is alleged that Mr. Li was behind a large
stock sale that triggered the crash.* (Of course, it was also important that
there weren’t enough buyers for that sale and additional sale attempts by
others afterwards.) Second, Mr. Li both owned stock (80 percent at the latest
filing) and had “short” stock (opposite of owning, 7.7 percent). Third, the company (not him) had pledged stock as collateral for a
series of loans, with the latest loan being USD 200 million. Finally, Hanergy
sales of equipment to its mother company were an important part of its business,
but the sustainability of that business model was questioned by some.

Confused by this information? It is chaotic, but for an
investor it is easy to add up: This is a company with so many question marks
that an investment would be risk at the level of pure speculation.
Interestingly, the actions leading to this risk were fully under the control of
the investor who lost the most from them: Mr. Li. Of course, we are familiar
with firm owners and top managers who take risks that look excessive to others,
so the Hanergy events are not new except for the scale of risks and losses.
They do however raise the question of what makes individuals and firms take
risk.

There has been much research on individuals taking risks
when facing losses guided by prospect theory, which is based on how people evaluate
gains and losses differently, and take high risks to escape losses. There has
been much research on organizations making changes when facing low performance
guided by performance feedback theory, which is based on how organizations
discover and seek to solve problems following disappointing performance, but
are less eager to find opportunities. A recent paper by Kacperczyk, Beckman,and Moliterno in Administrative Science Quarterly sheds new light on risk taking and changing by asking whether the
drivers of change and risk in organizations are the same.

The study findings speak to both theories. Organizational
change happens the way performance feedback theory specifies, both for risky
change and less risky change. But an important component of performance
feedback theory is what level of performance is seen as disappointing, and
there the results are different. Organizational change of the less risky kind
is driven by comparing the performance against that of other organizations, so
competitors in the market. Risky organizational change is driven by comparing
the performance against that of other units in the same organization. Why are they
different? Well, the internal comparison is not against market competitors – it
is against nearby managers and career rivals. That’s personal, and when losses
are personal people take risks. So, risky organizational change is a blend of
performance feedback and prospect theory.

What do these findings say about Hanergy? Well, so far we do
not have information of any fraud in the Hanergy case, so it looks like a big bet gone wrong. And the bet is interesting because it is made by an
individual who controls the firm so closely that there is little difference
between him and the firm. In such a case, any comparison of performance gets
personal because the firm falling behind means that he falls behind, so high
risk taking would be a natural response. It is a very good demonstration of how
closely held firms can go wrong.

*I knew I would end up correcting this paragraph. The initial report was incorrect; he actually bought shares just before the crash. I have not seen news yet on who made the fateful sale that started the price drop.

Tuesday, April 28, 2015

There is excitement in the business press around the
dealings that the state of France has with car maker Renault, and the impact
this could be having on the alliance of Renault and Nissan. The story starts
with complicated maneuvers by the Economy Minister (this is France, after all),
which are interesting enough to mention, but I will soon get to the alliance
issue.

The start of the excitement is that the French government
made a change in the stock voting rights late last year that benefits long-term
investors, because they get double voting rights, so double the power, if they
have held the shares for two years or more. But there is more to the law; it
can also be used to favor French or other European shareholders over others,
and specifically it lets the French state get double voting rights on its
shares. That is a big power grab in a nation that has large state shareholding
of many companies. The French government has assured managers and other owners
that their intentions are purely beneficial and they do not intend to
discriminate against others. The very existence of the law, and past French Economy
Minister behavior against firms, place that assurance very much in doubt.

But enough legal issues, over to alliances. The Renault –
Nissan alliance is famous as one of few very successful cross-border alliances
of large firms. It started more or less as a rescue of Nissan, which was in
bigger trouble than Renault when it was initiated, though neither firm was
healthy. As a result, both firms own a portion of each other, but Renault has
voting shares over Nissan but not the other way around. And what started as a
rescue led to very significant success and growth. Now Nissan has double the
car sales of Renault.

The Renault CEO Carlos Ghosn has made big personal
investments in making the alliance work, and has drawn much credit from its
success. He reacted quickly against the new law through seeking to make a
special Renault exemption from it (this is legal), as well as speaking publicly
against the law. No doubt he is doing this because Nissan enjoys their relation
with Renault but do not trust the French state. Indeed, he has been supported by his board of
directors, as well as from the Nissan board of directors. He has until recently
looked like he would be able to get a majority of Renault stockholders to vote
for the exception, as he is required to do.

And now I need to bring the French state maneuvers back into
the story. The Economy Minister Emmanuel Macron has arranged to buy a
substantial share of Renault stock and to have options to sell them after the
shareholder meeting. Translation: he is using taxpayer money to buy the votes
necessary to stop Ghosn at the shareholder meeting. This is nearly certain to
work, making France an even more important shareholder in Renault as intended.

What about the alliance, then? Well, it is going to be interesting.
As long as France does not intervene much, it is likely that it will go on as
before because Renault and Nissan are still useful for each other. But if there
are problems things could change dramatically because Nissan actually needs
Renault much less now than it used before. The main problem would be that
Renault owns so much of Nissan that getting away from Renault would be hard. It is easy to see ways that this change in power will cause problems, and much harder to see any benefits to the alliance -- or to France.

Sunday, April 12, 2015

Every now and then we hear news about employees who are
engaged in wrongdoing of various kind, usually harmful to customers and
employees. The most spectacular have been financial fraud, as when traders lose
money while performing trades that break the internal rules of their banks. UBS
trader Adoboli was convicted for unauthorized trading that led to a 2 billion
dollar loss; Barings Bank trader Leeson was convicted for unauthorized trades
that lost 1.4 billion dollar. Barings Bank went bankrupt; UBS bank stock owners
(and surely, customers as well) suffered financially from the losses.

We often think of such wrongdoing as being the result of bad
employees acting against their company, but is that really the right story? It is
certainly a poor fit with these trader cases, because both of them started trading out of control after losing money, not while making a profit. You
could see them as trying to avoid getting fired, but surely that does not fully
explain risking lengthy prison terms. In
fact, an odd but plausible true explanation is that their wrongdoing was an
attempt to save the firm from losses.

Research supporting this explanation has been done by Donald Palmer and Christopher Yenkey, and will soon be published in Social Forces.
They looked at another context with some famous wrongdoing: the cycling race Tour
de France. There, the beginning of blood monitoring in the 2010 race makes it
easy to investigate which cyclists likely engaged in blood doping or drugging,
even if they did not get blood values suspicious enough to fail tests. Of
course is well known that Lance Armstrong engaged in doping for many years and
was stripped of 7 wins; not everyone knows that Alberto Contador was declared
winner in 2010, but lost the victory after a drug investigation. The key point
in Tour de France is that players may cheat to benefit themselves and their
team, and it is actually possible to test what makes them most likely to cheat.

So what determined cheating? The role in the team is most important,
because specialists such as team leaders and sprinters had the most suspicious blood
values, while their supporting cyclists had the second-most suspicious values. Members
of teams that let each cyclist compete individually were least likely to cheat. People don't cheat for themselves as often as they cheat for their organization.

So we have an interesting result that should give pause to anyone who sees
wrongdoing in organizations as a result of individuals looking out for
themselves. It could be exactly wrong: they are trying to help their employer. This means that the right response against wrongdoing is not more organizational control of what people do, but less pressure to win.

Friday, March 13, 2015

There is now a report in Wall Street Journal on how firms
are increasingly using statistical analysis to find out which employees are
more likely to leave, and using this information to improve personnel management
and target employees for interventions to make staying more worthwhile. Firms
do this because replacing employees who leave can be very expensive, making the
analysis and the responses cheap in comparison. It says a lot that Wal-Mart, a
firm known to be careful about its expenses, is investing in such analysis. It
is probably less surprising that Credit Suisse does so, given the importance of
keeping staff in banking, or that some human-resource analytics firms do, given
that they can use these results to keep their own staff and sell the methods to client firms.

What have they discovered by analyzing their employees?
Well, they are more likely to leave if they have problematic managers or little
contact with co-workers, less likely to leave when they are given opportunities
to change jobs internally (especially promotions), plus a variety of other smaller
discoveries.

Is this surprising? Actually we have known it for a long
time. Job mobility is an established field of sociology and management
research, and as far as I can see the statistical analysis done by the firms
re-discovers what is already known. So, I would probably not go to a firm
statistician expecting to learn much new about job mobility, though I would
still find it interesting to see what they are doing.

Does that mean it is worthless? It does not. There are two
really significant pieces of progress in the news that firms are doing this
analysis. The first is that the whole point of studying job mobility is to understand
what happens to the lives of people and the fates of organizations, and it is wasteful
to have this understanding without also using it to improve the lives of people
and the fates of organizations. Job mobility is often valuable, but there are
also many cases of job mobility that is wasteful for the employee and the firm.
It is better to reduce them. The second piece of progress is that firms are now
gaining knowledge that lets them address the situation of each employee, and
they can often intervene in positive ways such as improving job content or
opening for promotions when they see a risk of that employee leaving.

There is of course some potential that this gets intrusive
or used in troublesome ways, so it is worth watching. Firms are after all able
to track health coverage decisions and health care use with enough detail that
they can start linking them to job mobility, something that would be new to
academic researchers and potentially troublesome. They could also track emails,
which academic researchers have already done but always anonymously. There are good reasons to limits such data
collection and analysis.

Even with these potential problems, it is nice to see
business catching up to the value of research. Of course, it has only done so to
a limited extent. The number of statistical analysts involved in this work is
far fewer than the number of human resource managers (and other managers) who
thinks that such management is an art that calls for their unique experience
and cannot be understood by others. Maybe some of these managers are right, but
on average I would place my bets on the statistician.

Wednesday, February 11, 2015

Those who pay close attention to media (or who simply have a
twitter account) know this story already. On the afternoon of February 11,
episodes of “House of Cards” were made available on Netflix, before the scheduled
release date. Fans delighted, started watching, and sent tweets inviting others.
The joy lasted a few minutes, and then the episodes were made unavailable
again.

Viewers were disappointed. Social media was in a frenzy. Soon they reached the
conclusion that this had been a very clever marketing stunt, designed
to make people talk about the new season just before it would be released. And
wow, did it ever work well, people did talk, and those who caught a view spread
the news of what they had seen to eager fellow fans. And in a way, it is
correct that this was a very successful form of marketing, at least if we take
seriously the idea that social media expresses interest in products (and we should
take that seriously).

But there is one interesting correction. It was great
marketing, but it was not a clever marketing stunt. In fact, it was an error
that the episodes had been made available, and they were made unavailable because Netflix discovered the error and corrected it. But how do we understand errors
like this, errors that turn out to be great in some way, like marketing in this
case?

A good way is to think of organizations as exploiting what
they currently know and exploring to gain new knowledge, an insight that stems
from an article by James G. March (see below). It makes sense to do both, because either
one alone, or as a too small proportion, will leave the organization
vulnerable. But here there is a problem. When seeking high performance and good
coordination among employees and units, organizations end up exploiting a lot,
and exploring very little. That’s a short-term benefit for efficiency, but also
a long-term problem because the organization can become obsolete. So finding
out how to explore enough, or even more than nothing, is a problem in designing
organizations. R&D departments are one solution, but actually they often
end up exploiting a lot of current knowledge too.

Fortunately there are some solutions that happen simply because
of the way organizations work. The “House of Cards” release is a good example
of one. An error is a form of exploration. Netflix did not intend to release
the series early, but after doing so they have learned something new and
valuable about marketing. Will they do it again, on purpose, on a later series?
I would be very surprised if they did not. Exploration gives new knowledge,
which organizations exploit later. And it really does not matter whether the
exploration was deliberate or an error; any useful knowledge can be exploited.

Monday, January 12, 2015

There is now work underway to make smart watches both at
Apple and other manufacturers using Android. In fact, many of them are already
on the market. Chances are you don’t own one. They have not sold particularly
well even though they are the size of a regular watch and can do additional
tasks. People have not found them useful enough, but now a new generation of
more advanced ones is coming along, and the makers are optimistic that this one
will be a hit. Some securities analysts agree, and have estimated Apple Watch
sales to be as much as 30 million units in the first year.

Why are the new ones different? Put simply, it is the
software you can buy (the apps) that make the difference. They will be giving
much more timely and relevant messages to you than those that earlier smart
watches had, and will significantly increase the ways such watches can be used.
Earlier smart phones were mostly for people concerned with fitness and health
who need a convenient way of recording data about themselves (they will click
the phone as soon as they wake up…). The new ones can also be used for
shopping, social network sites, orientation and sight finding in an unfamiliar place,
and even making payments.

A key feature of this application development, and the
reason Apple is seen as the leader even before the launch, is that alliances of
firms working closely together is needed for this launch to go well. A normal
launch of a smartphone will involve sharing knowledge of the programming
language and hardware so that the apps can run correctly, and is a familiar
task that does not require alliances. The Apple Phone and similar devices have
a range of new functions related to tactile feel (it can give information
through vibration functions) that need to be understood in order to fully use
them, and this requires close collaboration.

It also has functions related to location monitoring that go
far beyond the GPS functions of existing smartphones. You may have thought your
phone was accurate in locating you within a 2-5 meters – in fact, you may have
thought it could locate you within one meter, but that apparent accuracy is
just a guess based on the map information it has. This is nothing compared to
what a smart watch can do when helped by locator systems that are or will be
installed in buildings – the accuracy will be within a meter. And, it can
follow your motion so that a locator system will know exactly how you walked
around in a store. If you pay with the phone also, it can connect the pay
information with the walking information to find out what you looked at but did
not buy.

Impressive? Yes. Somewhat worrying? Well, I would certainly
start thinking about when I let the phone give away my location information. Or
maybe not buy one at all. I am impressed on behalf of what firm alliances can do, but I admit my feelings are mixed. This information collection is set up to be useful
for the user of the smartphone and the owner of the locator system (usually a
store, but not necessarily). Remarkably, it can do surveillance on people more accurately
than anything a government has been able to build.